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COLOMBIA:
A Business-Risk Assessment
Summary
The following report is meant to describe Colombia’s current political, security, regulatory and economic environments as well as provide a forward-looking assessment of the country’s energy sector over the next five years. Long known for its security problems, Colombia has made significant progress over the last decade in dealing with drug cartels and insurgent groups as well as in liberalizing the energy sector and creating a receptive environment for foreign investment.
The political climate in Colombia continues to be defined by the popularity of Colombian President Álvaro Uribe. Colombia is debating whether to allow him to run for a third term, although time is running out for Uribe to surmount various legal hurdles before a November registration deadline. In any case, high public approval of Uribe’s policies makes it unlikely that any alternative candidates will take the country in a different direction over the next five years.
A key aspect of Uribe’s popular policies is the positive investment climate. Reforms to the energy sector have been made in an attempt to increase oil production and reserves. These liberalization policies, initiated in 2003, have greatly improved investment conditions, but the sector continues to be hampered by its lack of major deposits, and much of future production increases are expected to come from the rising efficiency of older fields.
Colombia also faces underlying security problems. The cocaine trade will continue over the next five years, funding criminal and insurgent groups, largely because Colombia’s rugged terrain makes it difficult for the government -- despite an expanding military presence -- to effectively exercise its authority in many parts of the country. And while the government has succeeded in fracturing the country's various armed groups, which now pose less of a threat to the Colombian state, smaller and more independent organizations can be less predictable in their targeting and tactics.
Political Stability
The future of Colombian presidential politics has been in limbo for several months, as the country struggles to come to a consensus on a possible constitutional referendum for Colombian President Alvaro Uribe. Uribe remains highly popular (despite the declining economic conditions resulting from the international economic downturn), and there has been a great deal of support from the governing coalition for an amendment that would permit Uribe’s reelection. Two bills have been presented in the legislature. In the Senate, legislators have approved a law designed to allow Uribe to run for reelection in the May 2010 presidential election. However, the Colombian House of Representatives approved a bill that would require Uribe to sit out this election and allow him to run in the following 2014 election. If reconciled and passed as a single bill, the reelection law would then pass to the Supreme Court for review, which would then be followed by a pubic referendum.
If the process gets to the referendum stage, Uribe’s popularity makes it likely that voters would approve the reelection bid and that Uribe would be reelected as president. However, time may be running out for these processes to come to fruition. By law, Uribe must announce his candidacy by Nov. 30, 2009. Widening personal and political fractures within the Colombian legislature may make it difficult for the body to move with the speed necessary to reconcile the two bills, and the Supreme Court’s review of the law would normally take several months, making it unlikely that the country will be able to host a referendum in time for the November deadline.
In the increasingly likely event that Uribe is denied the chance to run for reelection -- whether by voters, the legislature or the Constitutional Court -- the field will be relatively open in May to a number of potential contenders. Uribe’s popularity has left little room for a strong opposition, and there is no clear alternative political platform. However, neither is there a clear successor. The parties of the governing coalition -- which includes the National Unity, Conservative and Radical Change parties -- will meet in September to select their individual candidates, then hold an inter-party election to select a single candidate.
A number of promising candidates have risen in the public eye over the past several months. Chief among them is former Defense Minister Juan Manuel Santos, who is a staunch supporter of Uribe but resigned from his defense post to position himself in the event that Uribe is not able to pursue a third term. Santos has the benefit of having presided over elements of the government’s security strategy at a time when the military has been able to make enormous strides against the Revolutionary Armed Forces of Colombia (FARC). Santos stands a good chance of being elected as the coalitional candidate, although there are concerns that his elite background could threaten his chances as a presidential candidate.
Other potential candidates include Medellin Mayor Sergio Fajardo; former presidential candidate Noemi Sanin, who until recently was Colombia’s ambassador to the United Kingdom; former Agriculture Minister Felipe Arias; and German Vargas Lleras, a leading member of the Cambio Radical Party. All of these candidates support Uribe’s policies in one way or another and can be expected to follow the basic outline of current political strategies.
Regardless of who wins the presidential election, the current policies of the government appear to have substantial public support, a fact that makes their continuity under future administrations quite likely. These policies include the push to root out corruption in the country, increased international economic linkage and a strong anti-FARC stance. Colombia’s investment policies have encouraged the arrival of a great number of foreign investors, and the liberalization of the energy sector is largely seen as a successful policy. Of course, changes to these policies cannot be ruled out, but it is unlikely that Colombia will experience a radical shift to the kinds of leftist populist policies that characterize the governments of Colombian neighbors Venezuela and Ecuador.
Corruption
Corruption certainly persists in Colombia, but it is perceived to have waned in recent years, and government efforts to increase transparency can be expected to continue. Polls of Colombian nationals suggest that the majority of corruption is believed to be in politics, and there have been a number of cases of corruption in the military. Indeed, some cases of high-level corruption have reached into the inner circle of the president over the past several years, many of which are related to the drug trade and FARC. Municipal governments tend to be particularly prone to corruption and have been found to abuse cash flow from local energy projects (which is provided by investor companies to the central government and then redistributed). In such cases, the government has been known to stop the flow of royalties to local governments in an attempt to dissuade corrupt practices. Because of the centralization of regulation in the energy sector under the command of the National Hydrocarbons Agency (ANH), corruption does not play a major role in the distribution and regulation of energy investment contracts.
Forecasts for the Energy Sector
Colombian Crude
Colombia has 1.36 billion proven barrels of crude oil reserves -- although estimated reserves range from 12 billion to 20 billion. Production averaged 645,000 barrels per day (bpd) in the first six months of 2009, up from an average of 588,000 bpd in 2008. Although total output has been on the rise over the past several years as a result of increased investment in, and partial liberalization of, Colombia’s energy industry, it remains far below mid-1990s production levels, which peaked at 830,000 bpd in 1999. The subsequent decline in production was a result of a failure to invest in the sector and the subsequent decline in available reserves. Of Colombia’s production, about half is exported (primarily to the United States), and domestic consumption averaged 291,000 bpd in 2008.
Most of the increase in production has been achieved at brown-field installations and is not a result of major new deposits coming on line. The U.S. Energy Information Agency (EIA) also estimates that a rise of Colombian production in 2008 was in part triggered by high oil prices that year and projects that if oil prices decline there will be downward pressure on supplies. It is difficult to project the direction of oil prices, however, and thus it difficult to use that measure as a predictor of production output.
Colombia’s oil deposits tend to be relatively small, with more than 80 percent of the country’s oil fields at less than 50 million barrels. Some of these smaller fields, when found, are too far from transportation networks to be commercially viable, and pipeline construction to the new fields is not worth the cost.
Five major pipelines dominate Colombia’s oil transport infrastructure. Four pipelines -- the Ocensa, Cano Limon, Alto Magdalena and Colombia Oil -- transport oil from production facilities in the northern portion of the country to the Caribbean port of Covenas. Colombia’s fifth operational pipeline is the Transandino pipeline, which runs from the Putamayo region in the southern part of the country and terminates at the port of Tumaco. There is one pipeline still under construction: The Rubiales pipeline, which will start in the Rubiales field and terminate at the port of Covenas. The Rubiales will be able to carry 170,000 bpd, and line filling will begin in late August 2009. The pipeline will be capable of sustaining a transporting upgrade to 260,000 bpd if additional pump stations are added.
The energy industry in Colombia has become increasingly dynamic in recent years as the government has sought to liberalize investment policies in an attempt to attract investment. The two main players in the energy industry are Colombian state-owned energy company Ecopetrol and the ANH. For many years, Ecopetrol was the only real player in the Colombian energy sector. The company was charged with exploring Colombian territory and administering joint ventures with international oil companies. However, in 2003 the Colombian government issued Decree 1760, which established the ANH, obliged Ecopetrol to compete with foreign private sector players and authorized the sale of up to 20 percent of Ecopetrol’s shares (the company is currently only 89 percent government owned, and it retains the ability to sell the remaining 9 percent of its shares).
In the wake of the liberalization, a number of major players have entered Colombia’s upstream sector. These include the British energy company BP, which operates the Cusiana/Cupiagua complex, Colombia’s largest field (although production has declined at this field 50 percent since 1999). The Cano Limon field is operated by U.S. energy company Occidental. Other major players in the upstream Colombian energy sector include Brazilian energy company Petroleos Brasilieros (Petrobras), the Colombian company Petrotesting Colombia S.A. and the Canadian-owned, Colombian-based company Meta Petroleum.
The decision to liberalize the sector resulted from fears that the ongoing underinvestment and underdevelopment of Colombia’s hydrocarbon resources would force the country to be a net importer by 2005. The strategy has not only been to encourage international investment in exploration and production of oil but also to allow Ecopetrol to prioritize its own investment strategy.
Ecopetrol is the most active company in Colombia’s energy sector by far. The company is involved in most exploration and production projects, and Ecopetrol projects account for over 90 percent of total output. Other companies have become increasingly involved in the sector in the past five years, however, and have engaged in a number of exploration and production projects as well as downstream projects. These include an $800 million refinery upgrade at Cartagena operated jointly by the Swiss energy company Glencore International and Ecopetrol. The project, designed to produce higher quality refined goods, will be completed in 2010 and will bring capacity from 75,000 bpd to 140,000 bpd. A similar project at the Barrancabermeja-Santander refinery is in the initial stages, and a management-consulting contract on the expansion has been awarded to Foster Wheeler USA and Process Consultants.
Ecopetrol is operating on an oil investment plan that projects $60 billion worth of investment by 2015. The goals for the petroleum sector are to raise reserves by 500 million barrels and production by 1 million bpd and to bring refining capacity up from about 286,000 bpd to 650,000 by 2015. This surge in planned investment not only coincides with a renewal of pro-investment policies but also is a result of the country’s improving security situation, which is allowing the government to focus its attentions on economic growth and development and make rural areas safer to operate in.
Despite the increased peace and stability, there are a number of challenges for Colombia as it seeks to increase its oil production capacity. Although Colombia’s geology is promising by most standards (and the country is, of course, quite close to the massive oil reserves of Venezuela), the chance of major oil discoveries appears to be declining. Colombia’s oil reserves peaked in 1996, and despite ongoing exploration, there have been very few major new discoveries since the liberalization effort. Like Colombia’s oil deposits, discoveries tend to be relatively small, in the range of 20 million to 30 million barrels of oil per find. As a result, it is not clear whether the country will be able to dramatically raise its reserves. Nevertheless, the sector continues to see high levels of interest and investment.
Colombia does not have domestic manufacturing capacity for servicing the energy industry, although the country has eliminated import duties for services and equipment related to mineral extraction (a provision that will expire in October 2010). The majority of services -- including drills and rigs -- come from the United States. Sources in Colombia report that, while the number of drills and rigs available to energy investors is currently sufficient, demand is high enough that some in the industry have expressed concerns that there may not be enough available in the near future.
However, the Colombian government is actively engaged in courting more U.S. companies -- it recently hosted a delegation of 11 companies (including engineering services supplier Petrex) -- in hopes of increasing the goods and services available to the energy sector. In addition, the deteriorating investment climate in Colombian neighbors Ecuador and Venezuela is increasing investor and service-company interest and bandwidth for engaging the Colombian energy sector.